Sunday, January 15, 2017

In the logic of the market, it makes no sense to sacrifice trillions of dollars in current energy and income to build something we don't yet need.

Anyone seeking clarity on the energy picture a decade or two out is to be forgiven for finding a thoroughly confusing divide. On the one hand, we have reassuring projections from the U.S. Energy Information Administration (EIA) that assume current production of fossil fuels will remain steady for decades to come. Coal will continue to decline as a share of total energy consumption, and renewables will rise modestly. In other words, everything's hunky-dory, there's nothing to worry about.

If you want to really dig deep into energy consumption, then the EIA has a treat for you: a detailed 390-page PDF report: Energy Perspectives 1949–2011 (link to 390-page PDF).

But just when you conclude fossile fuels will remain cheap and abundant until 2040 and beyond, you read this:Civilization goes over the net energy cliff in 2022, which references a 65-page PDF report that details a much different view of energy that will actually be available to us, as opposed to estimates of reserves awaiting extraction: Depletion: A determination for the world's petroleum reserve (65-page PDF, available by permission of The Hill's Group)

Here's an excerpt:

Determining the depletion state of a resource is, however, not merely a matter of determining how much of the resource remains in the ground. A resource's depletion state has as much to do with the efficiency with which it can be extracted and used as it has to do with the quantity of resource remaining in the ground. To define oil's depletion state it is necessary to look at the efficiency with which crude oil can be extracted, processed, and used. Therefore it is necessary to understand why petroleum is produced, and then be able to analysis the entire production process; not just the extraction portion. The Quality Control Engineer defines this as determining "fitness for use". To define crude oil's depletion state we must first determine the quantity of it that is "fit for use".

Every barrel of oil on average, has required more energy to extract and process than the barrel that came before it. Since the specific exergy of a unit of oil is, and always has been the same, less and less energy per unit remains for use by the end consumer. The "fitness for use" of crude oil must also then be dependent on variables relating to its energy delivery capabilities.

In other words--we cannot project future energy available for consumption without factoring in a host of other variables: not just the cost of extraction at the well head but of processing and transport. If this report is correct, the energy left over for consumption after we deduct the energy required for extraction, processing and transport is declining, as the easy-to-extract, easy-to-process, easy-to-transport oil has largely been depleted.

At the risk of simplifying a complex and nuanced analysis, here is my summary: Tverberg makes the case that today's global industrial economy is in a double-bind without resolution: if energy costs rise enough to make extraction and processing of hard-to-get oil/gas profitable, the high costs of the resulting energy will inevitably push the growth-dependent economy into recession or depression.

This is the inescapable result of structuring the economy so it optimizes continual, permanent expansion of everything: more resources, consumption, earnings, debt and taxes skimmed from the productive elements of the economy.

Once growth hits limits of any kind, the economy doesn't enter a steady-state--it collapses, because it is dependent on expansion.

But if energy costs decline to the point where households and enterprises can afford to expand consumption, the low prices render an increasingly significant share of fossil fuel extraction unprofitable.

Tverberg also ties this energy double-bind into debt and wages: we can play a game of borrowing the higher costs of energy needed to keep the economy afloat, but eventually the rising debt load is recognized as being unpayable, and buyers of new debt demand a risk premium. As the costs of debt rises, the window of paying for higher energy costs with cheap debt closes, and the economy is stuck paying the real costs of energy.

Since wages are ultimately paid out of the surplus energy and value extracted from consuming that energy, as cheap, abundant energy declines, so do wages, leaving households with less money to spend on consumption and debt payment.

So which narrative do we believe: the one in which fossil fuels remain relatively affordable and abundant for another 30+ years, even as hundreds of millions of new middle-class consumers clamor for energy-hungry autos, SUVs, motorcycles and air travel, or the one in which cheap energy becomes a cherished memory in less than a decade?

Here's my question: will our grandchildren wonder why we didn't build a renewable power grid when it was still possible? The time to build a renewable power grid that is self-sustaining and durable enough to outlast the end of cheap oil is when oil/gas are still cheap enough to fund the build-out.

The grand irony of human nature and the market economy is that as long as oil/gas are cheap, there's no need to build a renewable power grid. If we believe oil/gas will remain cheap for decades to come, why waste the surplus building a costly renewable power grid when we could fly to Bali with that cheap oil, or build another 100 million vehicles to sell to newly minted middle-class households?

By the time it's obvious that we could really use a renewable power grid, it will be far too costly to build without drastically slashing consumption. Once we blow up the borrowing-from-the-future machine, a.k.a. debt, it's going to be harder to fund the construction out of declining future energy surpluses.

Though we cannot know which narrative will prove correct, we do know that renewable energy is at present a very thin slice of total energy consumption.Courtesy of the EIA, here is a chart of energy sources. (This is dated 2011, but the mix hasn't changed much.)

Note that all renewables are only 9% of total energy, and that 57% of that 9% is provided by the ancient sources of wood and hydropower (water wheels and turbines). A modest 15% of the 9% (i.e. 1.35% of the total energy) are generated by solar and wind energy.

How many trillions of dollars must be invested to replace even 20% of the energy currently provided by fossil fuels? There's an opportunity cost to this money, of course; if we blow trillions on another 500 million energy-hungry vehicles, thousands more airliners (at $100+ million each) and vacations to Bali, there will be trillions less available for investing in a functioning, resilient, sustainable renewable energy grid.

In the logic of the market, it makes no sense to sacrifice trillions of dollars in current energy and income to build something we don't yet need. So we'll put it off until we need it, but by then, we'll have squandered all the cheap energy and money on the "growth of any kind is good" economy.

Tragi-comedy in the making, or no worries, mate, energy will be cheap and abundant for decades to come? We won't know which is true until it's too late to fashion an affordable alternative.

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